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Tax, Centrelink snares flagged with TRIS conversion

Depending on whether a TRIS has been commuted and restarted as an account-based pension or instead converted to a retirement phase TRIS, this will have different consequences for reporting, Centrelink assessment and tax, cautions a technical expert.

Topdocs national manager for training and advice Michael Harkin said that if a client with a transition to retirement income stream (TRIS) is about to meet a condition of release with a nil cashing restriction, the SMSF practitioner will need to help the client decide whether to commute and restart the pension as an account-based pension or convert it to a retirement phase TRIS.

In the past, the industry practice was that a TRIS would automatically convert to an account-based pension once the individual met a condition of release, Mr Harkin explained. However, the ATO has directed that from 1 July 2017, this is no longer applicable.

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Mr Harkin stressed that there are a number of critical factors to consider when determining whether a TRIS should be commuted and an account-based pension commenced, or alternatively, if an election to convert the TRIS to retirement phase should be made.

One of the considerations with the first option, the national manager said, is whether that will cause any Centrelink income test grandfathering to cease.

“Centrelink assessment of superannuation income streams commenced after 1 January 2015 is based on a deemed rate of return applied by Centrelink to the value of the pension when assessing the entitlement of an individual to government benefits,” Mr Harkin explained.

“Income streams commenced before 1 January 2015 are grandfathered so the income test deeming does not apply.”

Resetting the pension may therefore result in the new account-based pension being assessed under the deeming provisions.

SMSF practitioners should also keep in mind that new documentation to commence an account-based pension will be required and a pro-rata pension payment will need to be made before the commutation.

“A transfer balance account report of the commencement of the account-based pension will also be required,” Mr Harkin said.

“The account-based pension will be in retirement phase, meaning the income on assets supporting the pension will effectively be tax-free.”

Where the TRIS is instead converted from accumulation phase to retirement phase, on the other hand, the TRIS does not stop, the national manager explained, meaning that the Centrelink income test grandfathering, if applicable, will not cease.

While the TRIS will automatically convert to retirement phase if the member reaches age 65, documentation enabling the member to elect to convert is required in other instances, Mr Harkin said.

It is not necessary to make a pro-rata minimum payment; a TBAR report of the conversion of the TRIS will be required.

As the restrictions for a TRIS are removed when the recipient meets a condition of release with a nil cashing restriction, the TRIS in retirement phase is effectively a mirror image of an account-based pension, the national manager said.

“[However], there is one particular difference which has been recognised as an unintended consequence of the legislation introduced from 1 July 2017, which relates to the automatic reversion of the TRIS following the death of the initial recipient,” Mr Harkin said.

“The current legislation permits the reversion only if the beneficiary has met their own condition of release with a nil cashing restriction. Legislation has been introduced to Parliament to remove that restriction, effective 1 July 2017, so that the same conditions as for an account-based pension will apply.”

Until the legislation is passed, consideration should be given to those instances where the proposed beneficiary may not have met their own condition of release with a nil cashing restriction, Mr Harkin warned.